Investors underestimate China’s delay in economic stimulus, requiring at least 5% of GDP. Deflationary pressure intensifies.

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Investors are underestimating just how behind the curve China is in stimulating its economy. Looking at the chart below, it is clear that a 5% of GDP stimulus package is the minimum needed just to prevent growth from weakening further.

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WSJ/Opinion | China Falls Into Its Own Trap

According to recent Wall Street Journal reports, up to 90 million housing units across China stand empty in a country whose population is falling. Real-estate developers cannot service their loans. Local governments, which have long funded their programs by land sales to developers, are drowning in debt. With government encouragement, Chinese households invested nearly 80% of their total savings in real estate. Now that house prices have fallen about 30% since 2021 in some markets, shocked consumers are reining in their spending.

Industrial profits are down 17.8% in the past year. Youth unemployment continues to rise. Europe and the U.S. are planning new tariffs against an expected flood of cut-price Chinese exports. Banks don’t want to lend, and foreigners don’t want to invest.

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Faced with these problems, China is dodging the difficult task of structural reform. Policies designed to deflate the real-estate bubble are being replaced with measures to strengthen housing demand. Banks will be subsidized to make more loans to flailing factories and overindebted local governments. Efforts to rein in make-work infrastructure spending by local governments (like unneeded highways and bridges to nowhere) will likely yield to a renewed emphasis on creating jobs, even as subsidies encourage unemployed youngsters to get more degrees to qualify for nonexistent jobs.